This is the latest installment of the DTC Briefing, a weekly Modern Retail column about the biggest challenges and trends facing the volatile direct-to-consumer startup world. To receive it in your inbox every week, sign up here.
This year proved to be another eventful, unprecedented period for direct-to-consumer startups.
Many DTC brands were still riding high at the beginning of 2022. In 2021, there were a record number of DTC IPOs, while record venture capital funding levels meant some DTC startups were sitting on a very healthy pile of cash at the beginning of the year. E-commerce growth was starting to slow compared to the record online sales activity seen during the pandemic, but many startups continued to see year-over-year revenue increases.
But over the course of 2022, the prospects of many once-bright DTC startups quickly deteriorated. Peloton and Glossier went through multiple rounds of layoffs, the market caps of publicly-traded pioneers like Allbirds and Figs tanked, while other brands quietly closed their doors.
There have been a lot of predictions over the past several years that there would finally be a DTC reckoning on the horizon. But this finally felt like the first year that some of the systemic issues that have long plagued DTC brands — like high customer acquisition costs and unclear paths to profitability — finally came to a head. In the worst case scenario, some brands like Haus shuttered entirely.
In turn, it’s likely that we will see more DTC brands shutter in 2023. At the same time, a more clear understanding of what it takes to make it as a modern e-commerce brand may emerge. This year, founders recognized that the key to building a brand that can last means meant ensuring that their products can be bought by more people in more places, and not just relying on social media and beautiful branding to gain recognition. Here are the major themes that stood out
More brands abandoned the DTC model in categories where it didn’t make sense
It wasn’t all doom and gloom for e-commerce in 2022. But many of the brands that found success in 2022 weren’t pure-play DTC brands. Hero Cosmetics sold to CPG conglomerate Church & Dwight for $630 million, while Liquid Death hit a $700 million valuation. While often cited as DTC “success” stories, both Hero Cosmetics and Liquid Death generate the bulk of their revenue from a variety of brick-and-mortar retailers and online marketplaces, such as Amazon and Target.
The early 2010s were dominated by founders that sought to cut out the middleman in nearly every product category, from contact lenses to suitcases. And for years, these brands were propped up by high levels of venture capital funding, cheap social ads and high levels of online shopping growth. In turn, this made the DTC model appear more financially sustainable than it actually was to industry outsiders.
But in 2022, a bunch of factors started to make the DTC model unsustainable, in a more urgent way than ever before. No category exemplified this shift more so than beverage.
As Andrea Popova, CEO of brand discovery site CPGD told me, the beverage industry has had challenges selling its products online for years.
“Beverage is just so hard to ship and it requires refrigeration and a lot of cases,” Popova said. “It’s not something that people really tend to buy direct to consumer on a subscription basis, which makes shipping and other costs even more challenging for founders.”
But this year, beverage brands faced a number of challenges that made the prospect of selling their products online, through their own websites, even more unsustainable.
Venture capital funding dried up, meaning fewer brands could finance unsustainable growth tactics like building out a DTC channel. More people returned to shopping in stores, and inflation made nearly every aspect of running an e-commerce business more expensive.
In turn, more DTC founders in more categories are looking to sell their products in more places. Fintech company Ampla, which provides alternative financing to e-commerce brands, reported that a cohort of its clients across food, beverage and wellness saw a decrease in Shopify revenue as a percentage of total revenue for the first time this year.
The continued quest for Meta alternatives
At the beginning of 2022, DTC founders were hungry for alternatives to Facebook properties. Apple’s iOS 14 update rolled out in the first quarter of 2021 — and over the course of the last year, it has made it more difficult for brands to reach as many people as they used to via paid social.
The brands I’ve spoken with this year have tested out everything from offline marketing channels to influencer partnerships to affiliate programs, all in the hopes of finding more ways to sustainably acquire customers. But no one clear alternative to Meta has emerged.
For example: TikTok began to explode in popularity at the beginning of the year. Newer startups like August and Peace Out Skincare started to make TikTok core to their new customer acquisition strategy.
But Tiktok’s popularity as an advertising channel has also fluctuated over the past year. Among a cohort of Ampla’s clients, TikTok placed third in percentage of total ad spend, behind Facebook and Google. But TikTok spend peaked in March, making up 9% of of digital ad spend among Ampla’s clients. But in November, that fell to just 3%, while Facebook accounted for more than 80% of digital ad spend. What that says is that brands are still making Facebook the front and center of their marketing strategy, especially during critical sales periods like Black Friday and Cyber Monday.
“Despite the challenges, [Facebook] still has the best tracking of all the platforms,” Mike Grillo, vice president of marketing at Ampla told me.
Inflation leads brands to rethink their growth calculus
Record-high levels of inflation impacted nearly ever decision DTC brand executives had to make this year. The cost of nearly aspect of running an e-commerce business, from advertising to shipping to packaging, has gone up this year.
Behind the scenes, many brands have been quietly making changes to their marketing, logistics and production to save money wherever they can. In turn, Popova told me that the beverage brands that she feels like are best poised for success in 2023 are those whose products are easier to ship — for example, if they’re shelf stable or use lighter packaging. She said she’s also seeing more CPG brands embracing powder mixes or packets as raw materials like aluminum or glass become more expensive, citing condiment startup AWSM as one example.
But inflation has also created a demand challenge for startups. As shoppers become more price conscious, it makes them less likely to be willing to shell out money on new items.
In turn, Grillo told me that he is seeing an increased focus on retention and loyalty among Ampla’s clients. This year, some startups started testing out try before you buy in order to give price-conscious customers more reassurance that they wouldn’t regret spending money on products from untested startups. Other brands, like Three Ships and Caraa, used key sales periods like Black Friday to reward their most loyal members by giving them early access to discounts, rather than pumping more money into new customer acquisition.
As Grillo put it, the name of the game in 2022 was for brands to test out “anything to sort of get people to spend more, without having to necessarily like acquire a new customer.”
What I’m reading
- Hair care brand Olaplex has been going viral on social media for all the wrong reasons, as consumer complaints bubble up on TikTok and Instagram about its products. It’s a good example of some of the thorny social media challenges buzzy brands have to grapple with.
- L Catterton’s latest investment is in BloomChic, an online apparel brand that sells clothing in sizes 10-30 for women.
- Insider took a deep dive into Revolve’s influencer program.
What we’ve covered
- Member exclusive: How bedding brand Cozy Earth took its affiliate program in house, after seeing positive network effects from being mentioned on gift guides like Oprah’s Favorite Things.
- Why more startups, including Prose and Fly by Jing are releasing candles in time for the holidays.
- Vitamin startup Ritual is betting on podcast advertising to attract more loyal customers.